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Wheat supply tightens, but prices capped by U.S. inventories

* Dry conditions curb output in Europe, Black Sea, Australia

* Market tightens as world wheat surplus under pressure

* Chicago prices seen capped at $6 on high U.S. inventories

By Naveen Thukral

MELBOURNE, July 31 (Reuters) - The global wheat market is facing a period of tighter supply from dry weather in key exporters, but large U.S. inventories will likely cap the U.S. futures market at around $6 a bushel, the head of a commodity analytics firm said on Tuesday.

Global wheat prices have been rising as dry conditions are expected to curb production in Europe and the Black Sea region as well as Australia, following years of bumper production.

"In the wheat market we are probably somewhere moving from surplus to tighter supplies," Bill Lapp, president of U.S.-based Advanced Economic Solutions told Reuters ahead of an industry conference in Melbourne, starting Wednesday.

"Prices will be capped at $6 a bushel if the production stabilizes at current levels because of U.S. stocks."

U.S. wheat futures retreated on Tuesday after posting gains of more than 3 percent in the previous session on concerns that global production will fall short of expectations amid unfavourable weather conditions across major exporters.

The most-active wheat contract on the Chicago Board Of Trade was down 0.6 percent at $5.43-1/2 a bushel, as of 0603 GMT. Wheat has risen about 15 percent over the past three weeks.

Global wheat production has hit record highs for the past five years, since 2013/14, with 2017/18 output climbing to 757.92 million tonnes. But this year the output is expected to decline to 736.26 million tonnes, according to the U.S. Department of Agriculture data.

Lapp said dry weather was rapidly cutting global inventories.

"We have dry weather in Europe, here in Australia and other parts of the world. We have lost more than five million tonnes in the last 10 days or so," he said.

Unfavourable weather conditions persist in North America, Russia, Europe and Australia, which is set to limit production, analysts said.

Last week, the International Grains Council projected the world wheat production would sink to a five-year low.

Even in the United States, scouts on an annual crop tour of North Dakota, the top U.S. spring wheat producer, found below-average harvest potential in this year's crop, with hot weather likely to curb production.

The crop was likely to fall well below the USDA's projection for record-tying yields. (Reporting by Naveen Thukral; editing by Richard Pullin)

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